20% of ETF owners say ETFs make up at least a quarter of their total
investments

Even with a perceived proliferation of ETFs on the market today,
two-thirds (66 percent) of investors say there is room for more,
according to a new study by Charles Schwab. Among them, nearly 60
percent say more ETFs will lead to increased competition and lower
prices, and that continued product innovation is necessary to keep up
with a changing market and economy. More than a quarter (28 percent) say
that more product choice is the industry trend that has most benefited
investors in the past few years.

The
2014 ETF Investor Study by Charles Schwab is the fourth
installment of an annual online survey of more than 1,000 individual
investors between the ages of 25-75 with at least $25,000 in investable
assets who have purchased ETFs in the past two years or are considering
doing so in the near term.

The study found that seven out of ten investors say they are confident
in their ability to choose an ETF that is right for their investment
objectives. Yet, even as investors are embracing choice, a surprising 38
percent of investors say they want a better understanding of how to
choose an ETF. Thirty-nine percent would like to better understand how
to best use ETFs in their portfolio.

“It’s clear that investors expect innovation and choice when it comes to
ETFs, but that enthusiasm is coupled with a desire for a deeper
understanding of how to choose and use the products,” says Heather
Fischer, vice president of ETF platform management at Charles Schwab.
“Although 40 percent of investors still consider themselves ETF novices,
that group has been steadily shrinking and is down from 45 percent in
2013. What this means is that education remains a top priority but as
ETF investors are becoming increasingly savvy, they are seeking
products, strategies and access that go beyond the basics.”

A leader in the retail ETF market, as of May 31, 2014, Schwab had $210
billion in ETF assets custodied on its platform. Its proprietary Schwab
ETFsTM had $20.5 billion in assets as of May 31, 2014.

A Healthy Serving of ETFs

ETFs make up an average of 18 percent of portfolios among those who own
them. One in five owners says that ETFs account for 25 percent or more
of their total investments, up from 16 percent who said the same thing
in 2011.

Investors use ETFs to accomplish a variety of investment goals.
Forty-four percent primarily use ETFs for core or long-term holdings,
while 22 percent use them for tactical or short-term investments. And 34
percent of investors like ETFs for both long- and short-term holdings.

When asked to imagine their investment portfolio as a dinner menu:

57 percent of investors compare ETFs to a side dish

30 percent of investors look at ETFs as an optional dessert

13 percent view them as the main entrée

While the majority of investors see ETFs as a side dish now, there is
evidence that the portion is growing, and more are likely to see it as
an entrée in coming years. Half of all investors expect that their
portfolio will have a higher proportion of ETFs in the next five years.

When it comes time to buy ETFs, funding will come from cash: 44 percent
will tap existing cash from money market or other accounts, and 40
percent will invest with new cash.

Confidence is Key

As investors gain a deeper understanding of ETFs their confidence grows.
The most
confident ETF investors– the 16 percent of all investors who say
they are extremely confident in their ability to choose an ETF – see
ETFs playing a more significant role in their portfolio:

38 percent view ETFs as the main entrée of their investment portfolios

63 percent expect to increase their ETF investments in the next year,
compared to 46 percent of all investors

Education: Beyond the Basics

Forty percent of investors say they know more about ETFs today than they
did last year. Sizable numbers of investors say they “have a good
understanding” of many ETF basics, such as how they differ from other
products (45 percent), the benefits and risks of investing in them (37
percent and 36 percent), and how to use ETFs for targeted exposure to
certain asset classes (34 percent). The study shows that investors are
looking for what is next and want education to advance their
understanding of ETFs. The topics of highest priority, where perceived
knowledge is low and a desire for more understanding is high, are as
follows:

ETF Education Priorities

Don’t understand

Would like to better

understand

How to choose an ETF

21 percent

38 percent

How to best use ETFs in a portfolio

20 percent

39 percent

The tax implications of ETFs

27 percent

45 percent

How to best use more sophisticated Exchange Traded Products (ETPs)

52 percent

34 percent

New Frontiers

This year’s study reveals that 39 percent of investors are curious to
learn more about ‘smart beta1’ products that use
fundamentally weighted indexes, low volatility or equal weight
strategies, among others. Of that group, three quarters want a better
understanding of the differences between smart beta strategies and
nearly eight in ten want to know how to best use them in their
portfolios. Nearly a third of investors are interested in learning more
about Exchange Traded Notes and commodities ETFs.

Product and Strategy Interests

Don’t know

Would like to learn

anything about

more

Commodities ETFs

40 percent

32 percent

Exchange Traded Notes

63 percent

30 percent

Smart Beta ETF strategies

67 percent

39 percent

Investors are also interested in new ways to access ETFs. Three out of
five want ETFs in 401(k) plans. The most attractive benefit, according
to these investors, would be the ability to invest in market segments
that are more accessible than mutual funds (37 percent). The appealing
low cost of ETFs (24 percent) and their intra-day tradability (24
percent) followed. One in five respondents predicts that increased
availability of ETFs in 401(k)s will be the most positive ETF trend for
investors in the next several years.

“ETF investors welcome innovation and as they look ahead they believe
that better education, more products and choices and the availability of
ETFs in 401(k) plans will be one of the most critical developments for
ETF investors over the next several years,” noted Fischer. “The future
of ETFs certainly appears bright, but as an industry it is our
responsibility to keep the flame alive with the right education and
resources so investors can keep pace.”

About ETFs at Schwab

Schwab offers a range of resources to help clients choose ETFs that fit
their investment needs, including the Schwab ETF Select List™;
tutorials, education, research and tools available via Schwab’s online
ETF center and the ETF Education Exchange®; and live events at local
Schwab branches.

In addition to the 21 proprietary ETFs from Charles Schwab Investment
Management, which can be bought and sold commission-free online in
Schwab accounts, Schwab ETF OneSource offers investors and advisors
access to the most commission-free ETFs anywhere in the industry2.
Commission-free online trading is available to individual investors at
Schwab, to the nearly 7,000 independent investment advisors who use
Schwab’s custodial services and through Schwab retirement accounts that
permit trading of ETFs.

About the 2014 ETF Investor Study by Charles Schwab

The 2014 ETF Investor Study by Charles Schwab is the fourth
installment of an annual online survey of more than 1,000 individual
investors between the ages of 25-75 with at least $25,000 in investable
assets who have purchased ETFs in the past two years or are considering
doing so in the near term.

Conducted by Koski Research from May 8 – 14, 2014, the study has
approximately a 3% margin of error. Survey respondents were not asked to
indicate whether they had accounts with Charles Schwab. All data is
self-reported by study participants and is not verified or validated.

About Schwab

At Charles Schwab we believe in the power of investing to help
individuals create a better tomorrow. We have a history of challenging
the status quo in our industry, innovating in ways that benefit
investors and the advisors and employers who serve them, and championing
our clients’ goals with passion and integrity.

Investors should consider carefully information contained in the
prospectus, including investment objectives, risks, charges, and
expenses. You can request a prospectus by
calling Schwab at 800-435-4000. Please read the prospectus carefully
before investing.

Investment returns will fluctuate and are subject to market volatility,
so that an investor’s shares, when redeemed or sold, may be worth more
or less than their original cost. Unlike mutual funds, shares of ETFs
are not individually redeemable directly with the ETF. Shares are bought
and sold at market price, which may be higher or lower than the net
asset value (NAV).

Commodity-related products carry a high level of risk and are not
suitable for all investors. Commodity-related products may be extremely
volatile, illiquid and can be significantly affected by underlying
commodity prices, world events, import controls, worldwide competition,
government regulations, and economic conditions.

Exchange Traded Notes (ETNs) are distinct from Exchange Traded Funds
(ETFs). ETNs are debt instruments backed by the credit of the issuer and
as such bear inherent credit risk. ETNs are not generally appropriate
for the average investor.

Charles Schwab & Co., Inc. receives remuneration from third-party ETF
companies participating in Schwab ETF OneSource™ for record keeping,
shareholder services and other administrative services, including
program development and maintenance.

2 Conditions Apply: Trades in ETFs available through Schwab
ETF OneSource™ (including Schwab ETFs™) are available without
commissions when placed online in a Schwab account. Service charges
apply for trade orders placed through a broker ($25) or by automated
phone ($5). An exchange processing fee applies to sell transactions.
Certain types of Schwab ETF OneSource transactions are not eligible for
the commission waiver, such as short sells and buys to cover (not
including Schwab ETFs). Schwab reserves the right to change the ETFs we
make available without commissions. All ETFs are subject to management
fees and expenses. Please see Charles
Schwab Pricing Guide for additional information.